The Economist - USA (2021-07-17)

The Economist July 17th 2021 Finance&economics 63

quarterly profits in 2018and 2019 (seechart
on  previous  page).  JPMorganreleased a
handsome $3bn of loan­lossprovisionsas
profits,  and  Bank  of  Americaaddedback
$2.2bn. After a hectic firstquarter,trading
activity  slowed  at  Citi, Goldman and
JPMorgan. But frenetic dealmakingmeant
that  investment­banking revenues grew
robustly;  fees  at  JPMorgan,forinstance,
rose  by  25%  on  the  year.(MorganStanley,
another big bank, was duetoreportonJuly
15th after The Economist wenttopress.)
Early in the pandemic,bankbosseshad
downplayed  their  windfalls.Retailbank­
ers  emphasised  the  uncertainty around
loan  repayment.  Most  bosseswereaware
that  any  boon  from  bumpertradingearn­
ings was likely to be undonebyloanlosses
as  millions  of  workers  werelaidoff.They
also warned that their investment­banking
revenues  were  certain to “normalise”
soon,  as  unusually  hightrading,issuance
and deal activity sloweddown.
This  quarter,  however, bosses threw
caution  to  the  winds.The healthofthe
American  consumer  isapparentintheir
credit­card  habits,  saidBrianMoynihan,
the  boss  of  Bank  of  America.Repayments
remain  unusually  high—customers are
not  accruing  debt—even as they report
mammoth growth in spending,upby40%
year­on­year  and  22%  onthefirsthalfof

2019. As for investmentbanking,MrSolo­
mon  pointed  to  the  pandemic­ledaccel­
eration in companies’ digitalstrategiesasa
potentially lasting driveroftheirlucrative
mergers and acquisitionsbusiness.
Whether  that  rosy  confidenceiswell­
placed  or  not  remains tobe seen. High
prices  and  supply  bottleneckscouldslow
the  economic  recovery.Manybankssaid
their  own  costs,  especiallywages, were
creeping up. Several stimulusschemes,in­
cluding generous unemploymentbenefits
and moratoriums on evictionsandforeclo­
sures, are due to unwindinthesecondhalf
of 2021; without them, Americans’financ­
es may start to look lesssolid.
Nor  has  the  pandemicbeenallabout
tailwinds for banks’ profits.Lowerinterest
rates,  slashed  to  zero  bytheFederalRe­
serve to support the economy,aredragging
down  the  income  theymakeoninterest.
Bank of America’s net interestincome,for
example,  fell  from  $10.8bninthesecond
quarter of 2020 to $10.2bninthesameper­
iod this year. 
If moves in share pricesareanythingto
go by, then investors arelessbullishabout
banks’  futures  than  executivesappearto
be. Although profits at bothJPMorganand
Goldman  beat  expectations, their share
prices  still  closed  nearly2%loweronthe
day  they  reported  results(theyhavesince
regained some of those losses).Forthepast
year  bankers  have  mostlybeenpleasantly
surprised by the strengthoftheirbusiness­
es. That may soon change.n

TheEuropeanCentralBank

Promises,

promises

F

ormostofits 23 yearsoflifetheEuro­

peanCentralBank(ecb) hadthefuzzy

inflationtargetof“below,butcloseto,2%”.

Nooneknewwhatpreciselythatmeant,

buttheconsensusamongeconomistswas

thatthebankwasaimingforinflationin

theregionof1.7­1.9%.Inanycase stub­

bornlylowinflationrenderedthequestion

almostacademic.Averageannualinflation

intheeuroareasince 2013 hasbeenjust

0.9%comparedwith1.9%inAmerica,even

thoughinterestratesarebelowzeroand

theecbhashooveredupgovernmentand

corporatebondsforyearsinanattemptto

ginuptheeconomy.

Thebank’sstruggletoattainitstarget

hasprompted somesoul­searching.Last

year Christine Lagarde, its president,

launched areviewofitsstrategy,which

held“listening”eventsandporedoveraca­

demic papers.Its conclusions were an­

nouncedonJuly8th.Thebankplanseven­

tuallytoincorporatetheimpactofclimate

changeinitsmodelsand,potentially,tore­

flect climate considerations in its asset

purchases.Italsointendstopayattention

tothecostofowninga housewhenit stud­

iesinflation(incontrasttopracticeinoth­

errichcountries,thisisnotincludedinthe

euroarea’smeasureofconsumerprices).

Anditunveileda newsymmetricinflation

target,of2%.

Thegreaterclarityaroundthetargetis

welcome, andmight wardoff concerns

thattheecbwillraiseinterestratesbefore

aneconomicrecoverytakesfirmhold,asit

didin 2008 and2011.MsLagardenotedon

July8ththatthechangewonunanimous

supportfromthebank’s25­stronggovern­

ingcouncil.Butworkingoutwhatit means

fortheecb’smonetarypolicymayprove

morecontentious.

Fora start,thestrategyseemstomean

different things to different ratesetters.

JensWeidmann,thehawkishheadofthe

Bundesbankanda memberoftheecb’s go­

verningcouncil,tookpainstopointout

thatalthoughinflationmightdeviatefrom

thetargettemporarily,theecbwouldnot

aim to exceed it.That is in contrast to

America’sFederalReserve,whichalsore­

centlyreviseditstarget.Itplanstoaimfor

inflationof2%onaverage,toleratinga per­

iodofovershootinginordertomakeupfor

pastshortfalls.ButOlliRehn,thedoveish

governorofFinland’scentralbank,saidon

July 9th that he expected the ecb’s re­

sponsetoa shocktobequitesimilartothat

oftheFed.

Thedifferentviewsmightexplainwhy,

althoughMs Lagarde promisedthatthe

bank’snextmonetary­policy meetingon

July22ndwouldclarifywhatthenewtarget

meansforpolicy,fewanalystsareexpect­

ingbigchanges.(Theecbiscurrentlybuy­

ing€80bn,or$95bn,ingovernmentand

corporatebondsa month.)Economistsat

Barclays,abank,reckonthatthereview

shouldhave noeffect onthenear­term

pathformonetarypolicy,andthattheecb

wouldcontinuetosupporttheeuroareaby

buyingbonds.AnalystsatMorganStanley,

anotherbank,predictthattheecbmight

bringforwardanannouncementtophase

Whattheecb’snewtargetmeans

inpractice

Stickershock

Consumer prices rose by 5.4% in the year to June in America, and by 2.5% in Britain—

both well above economists’ expectations. Speaking to Congress on July 14th Jerome

Powell, chairman of the Federal Reserve, argued that America’s inflation surge is tem-

porary. A small number of huge price rises, such as those for used cars, are dragging up

the headline average rate. By contrast, the median price change is far lower.

Higher and higher

Consumer prices

Sources:FederalReserveBank

ofCleveland;HaverAnalytics

*Personalconsumptionexpenditures.

MeasuretargetedbytheFederal Reserve

6

4

2

0

-2

2120191817161514132012

US, consumer prices, % change on a year earlier

Mean

Median

106

104

102

100

98

2019 20 21

June 201=100

2%annual

growthtarget

Euro area

US PCE*

US Consumer prices

Britain